PB Law Blog... Trusts and Stuff

A recent case further bolsters Limited Liability Protection, in this case, under Federal Bankruptcy Law. 

In In re Warner, 480 B.R. 641 (Bankr, N.D. W. Va. Sept 27, 2012,) the trustee in the bankruptcy of an LLC member asked the Bankruptcy Court for a declaration that the LLC was dissolved pursuant to the LLC's own operating agreement, which called for dissolution upon the bankruptcy of a member.  In this case, the Court denied the Trustee's motion, relying on provisions in the Bankruptcy Act that trump other contracts.  This ruling left the trustee with very limited options for liquidating the member's LLC interest and paying out to the bankruptcy creditors. 

 

 

While most of my asset protection planning involves third-party (i.e. non-bankruptcy) creditors, however this case is important in light of the fact that the court upheld asset protection provided by the member's LLC. 

 

-Tiffany Ballenger, Esq.

 

 

SB 405 went into effect on October 1, 2011. It strengthens the asset protections available to Nevada-based entities. The updated charging order language affects Nevada Limited Liability Companies (LLCs), Corporations and Limited Partnerships (LPs). The law changed as follows: the new language in the statute makes the charging order the exclusive remedy of a judgment creditor- including single member LLC’s and single shareholder corporations. A charging order is a remedy issued by the court giving the creditor a lien over the debtor’s interest in the entity.
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In May of 2011, a federal bankruptcy case, Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD (2011) led many planners and clients to doubt the protection afforded by Domestic Asset Protection Trusts (DAPTs). Judge MacDonald set aside Thomas Mortensen’s transfer of real property to an Alaska asset protection trust as a fraudulent conveyance. This case came in direct opposition from previous holdings on the same issue, as the Grantor of the trust was not only solvent when he transferred the subject property, but he was also beyond the state statute of limitations for transfers.  In Alaska, the statute of limitations is fours but only two years in Nevada. What does this mean for those who have created DAPTs as part of their overall estate planning and asset protection structures?

Following an expensive divorce, Mr. Mortensen drafted an Alaska Asset Protection Trust by himself. The trust was created to hold real property located in Alaska, worth only approximately $60,000 at time of transfer in addition to a cash gift of approximately $100,000 from his mother.   In 2009, more than four years after drafting the document, Mr. Mortensen become ill and subsequently racked up credit card debt.  He then filed for Chapter 7 bankruptcy.    Though he disclosed his personal assets and the fact that he had a DAPT, he did not disclose the property held by the DAPT.

Even though Alaska has a four-year statute of limitations on transfers to a DAPT, the court applied federal Bankruptcy law which enjoys a ten-year statute of limitations from the date in which a bankruptcy is filed.  Thus, the transfer to the DAPT was unwound, and the property transferred to the DAPT was sold to satisfy his creditors.

Practitioners are somewhat split as to this ruling.  Some believe that this case may be a death knell to transfers to a DAPT however, this case should be distinguished on its facts.  Unfortunately in this case, Mr. Mortensen drafted the DAPT and filed bankruptcy without legal counsel.   Had he not filed Chapter 7, Mr. Mortensen would have been protected from the unsecured creditors via the four-year statute of limitations and the ten-year federal rule would not have been applied.  Additionally, Mr. Mortensen was not in a good position to form a DAPT in the first place since he had declining income, low net worth and escalating debt.

Rather, I like to view this case as a whole as validating the fact that Asset Protection trusts should not be created to defraud creditors.  As such, this type of planning can still prove to be an integral part of one’s overall estate plan.

 

-Tiffany N. Ballenger, Esq.

Every parent wants to make sure their children are provided for in the event something happens to them while the children are still minors. Grandparents, aunts, uncles and other relatives often want to leave some of their assets to young children, too. But good intentions and poor planning often have unintended results.

For example, many parents think if they name a guardian for their minor children in their wills and something happens to them, the named person will automatically be able to use the inheritance to take care of the children. But that’s not what happens. When the will is probated, the court will appoint a guardian to raise the child; usually this is the person named by the parents. But the court, not the guardian, will control the inheritance until the child reaches legal age (18 or 21). At that time, the child will receive the entire inheritance. Most parents would prefer that their children inherit at a later age, but with a simple will, you have no choice; once the child attains the age of majority the court must distribute the entire inheritance in one lump sum.

A court guardianship for a minor child is very similar to one for an incompetent adult. Things move slowly and can become very expensive. Every expense must be documented, audited and approved by the court, and an attorney will need to represent the child. All of these expenses are paid from the inheritance, and because the court must do its best to treat everyone equally under the law, it is difficult to make exceptions for each child’s unique needs.

Quite often children inherit money, real estate, stocks, CDs and other investments from grandparents and other relatives. If the child is still a minor when this person dies, the court will usually get involved, especially if the inheritance is significant. That’s because minor children can be on a title, but they cannot conduct business in their own names. So as soon as the owner’s signature is required to sell, refinance or transact other business, the court will have to get involved to protect the child’s interests.

Sometimes a custodial account is established for a minor child under the Uniform Transfer to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA). These are usually established through a bank and a custodian is named to manage the funds. But if the amount is significant (say, $10,000 or more), court approval may be required. In any event, the child will still receive the full amount at legal age.

A better option is to set up a children’s trust in your will and name someone to manage the inheritance instead of the court. You can also decide when the children will inherit. But the trust cannot be funded until the will has been probated, and that can take precious time and could reduce the assets. If you become incapacitated, this trust does not go into effect…because a will cannot go into effect until after you die.

Another option is a revocable living trust, the preferred option for many parents and grandparents. The person(s) you select, not the court, will be able to manage the inheritance for your minor children or grandchildren until they reach the age(s) you want them to inherit—even if you become incapacitated. Each child’s needs and circumstances can be accommodated, just as you would do. And assets that remain in the trust are protected from the courts, irresponsible spending and creditors (even divorce proceedings).

credit: estate planning.com

Every day, potential clients come to find out how to protect their assets from potential creditors and lawsuits. Nevada law offers many “free” exemptions under NRS 21.090. However, many assets are still vulnerable such as non-homesteaded real property, bank accounts and investments. Fortunately, Nevada also offers other options for helping to safeguard these exposed assets.

Once risks and areas of exposure have been identified and the potential protection strategies have been carefully explored, a cost vs. benefit analysis should then be conducted before finally deciding which asset protection strategies to employ.

Two of the most widely used Nevada asset protection structures are the Nevada Limited Liability Company (LLC) and the Nevada Asset Protection Trust (NAPT).

Nevada LLC

A limited liability company formed in Nevada offers excellent domestic protection. Most practitioners agree that Nevada offers some of the most favorable corporate laws in the country. Some of the pros of a Nevada LLC are:

• Nevada’s statues generally favor businesses;
• The organizational requirements are quite informal- no annual meetings or minutes are necessary;
• LLC’s are flexible structures that can be used in many different ways- to own property, to manage an operating business and to hold liquid assets;
• LLC’s can be taxed in four different ways: as a disregarded entity, a partnership, an S-Corp or a C-Corp;
• Nevada, unlike many other states, has no state income tax or corporate tax; and
• Nevada LLC’s can be structured to maximize privacy and anonymity.

Perhaps most importantly, the members’ interests cannot be attached by a creditor. The only remedy against a member is to obtain a “Charging Order” allowing the creditor to lien or “charge” the member’s profit distribution rights when, or if, a distribution is made by the member of the LLC. As such, assets within the LLC are safe but trapped.

Nevada Asset Protection Trust

Nevada Asset Protection Trusts (NAPT) were created by The Nevada Spendthrift Trust Act, NRS 166.010 et seq. in 1999. Nevada is one of just a handful of states that provide a Trust of this sort.

This unique law lets an individual create a valid Grantor Trust where he or she is both the Trustee, the person who controls the Trust assets, and the beneficiary, while the assets within the Trust remain protected from creditors. Unlike many other states with similar laws, the Trust creator does not need to be a Nevada resident to create a NAPT. Additionally, any category of asset such as real property, personal property or liquid assets in any location can be protected with a NAPT.

NAPTs work in the following manner: By law, the Trust prohibits the assignment, alienation, acceleration and anticipation of any interest of the beneficiary under the Trust by the voluntary or involuntary act of the beneficiary or by operation of law or any process. Payments by the Distribution Trustee, a third party who has discretion to make distributions, are made only to the beneficiary who can also be the person establishing the Trust. The Trustee of a Spendthrift Trust is required to disregard and defeat every assignment or other act, voluntary or involuntary, that is attempted contrary to the provisions of the Nevada Spendthrift Act.

Some of the benefits of the Nevada Asset Protection Trust are:

• You keep control of your assets;
• You may receive the full benefit and use your own assets;
• You don’t need to give away your assets;
• You can protect any type, and an unlimited amounts, of assets from creditors;
• The Nevada Asset Protection Trust is less expensive to form and maintain and much less complex than foreign or offshore Trusts which are often troubled by IRS audits and complicated tax reporting requirements;
• The Nevada Asset Protection Trust may avoid loss of the assets through a bankruptcy; and
• The Nevada Asset Protection Trust can be integrated with your estate plan (remember, a “Living” or “Family” Trust does NOT provide the creditor protection benefits discussed above).

With all of its benefits, there are some disadvantages to an NAPT. If the Grantor of the Trust is also a beneficiary, a third party Distribution Trustee must serve as well, which means that the Grantor does not have absolute discretion. Additionally, there is a two-year seasoning period. If a creditor is a current creditor when the transfer of the asset to the NAPT occurs, the creditor must bring suit against the property transfer within two (2) years of the transfer or within six (6) months after the creditor discovers, whichever is later. After the seasoning period is over, the creditor is barred from bringing suit to recover said property.

Both of these techniques, amongst others, can be extremely useful in protecting assets and providing peace of mind in our volatile economy.

 

-Tiffany N. Ballenger, Esq.

The Nevada’s Homestead Exemption Protection law provides homeowners with an excellent asset protection device.  Nevada defines a “homestead property” as: Land with a dwelling on it; a mobile home whether or not the underlying land is owned by the mobile home owner; and/or a unit (such as a condo).  This protection is only available for one’s primary residence, not investment properties or second homes.

The amount of protection from creditors is the equity associated with the property up to the limit of $550,000.
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When considering how to leave assets to your adult children, first decide how much you want each one to receive. Most parents want to treat their children fairly, but this doesn’t necessarily mean they should receive "equal" shares of your estate. For example, you may want to give more to a child who received a college scholarship rather than for the child whose tuition you paid for.  Another good example is leaving more to a child who has served as caretaker for your or your spouse/partner. 

Some parents worry about leaving too much money to their children. They want their children to have enough to do whatever they wish, but not so much that they will be lazy and unproductive- the "trust fund baby" problem.   Certainly, you do not have to give your entire estate to your kids- you can choose to give to grandchildren, great-grand children or charities as well.  

Next, decide HOW the children should receive their inheritance.  Here are some options: 

 Option 1: Give Some Now
If you can afford to give your children or grandchildren some of their inheritance now, you will experience the joy of seeing the results. You could help a child buy a house, start a business, be a stay-at-home parent to your grandchildren, or even see your grandchildren go to college—and know that it may not have happened without your help. This would also let you see how each child might handle a larger inheritance.

Option 2: Lump Sum
If your children are responsible adults, this may seem like a good choice—especially if they are older and you are concerned that they may not have many years left to enjoy the inheritance. However, once a beneficiary has possession of the assets, he or she could lose them to creditors, a lawsuit, or a divorce settlement. Even a current spouse can have access to assets that are placed in a joint account or if your child adds his/her spouse as a co-owner. If it bothers you that a son-or daughter-in law could end up with your assets, or that a creditor could seize them, or that a child might spend irresponsibly, a lump sum distribution may not be the right choice.

Option 3: Installments
Many parents like to give their children more than one opportunity to invest or use the inheritance wisely, which doesn’t always happen the first time around. Installments can be made at certain intervals (say, one-third upon your death, one-third five years later, and the final third five years after that) or at certain ages (say, age 25, age 30 and age 35). In either case, be sure to review your instructions from time to time and make changes as needed. For example, if you live a very long time, your children might not live long enough to receive the full inheritance—or, they may have passed the distribution ages and, by default, receive the entire inheritance in a lump sum.

Option 4: Keep Assets in a Trust
You can keep your assets in a trust and provide for your children, but not actually give the assets to them. Assets that remain in a trust are protected from a beneficiary’s creditors, lawsuits, irresponsible spending, and ex- and current spouses. If you have a special needs dependent, or if a child should become incapacitated, the trust can provide for this child without jeopardizing valuable government benefits. If you have a child who might need some incentive to earn a living, you can match the income he/she earns. (Be sure to allow for the possibility that this child might become unable to work or retires.) If you have a child who is financially secure, you can keep the assets in trust for your grandchildren and future generations, and still provide a safety net if this child’s situation changes and he/she needs financial help. This option gives you the most flexibility, control and protection over the assets you worked a lifetime to accumulate and build.

While there is no one right choice for how to leave assets to all adult children, given many individuals’ concerns over protecting inheritances from creditors (particularly ex son or daughters in law), many choose leaving their assets in trust for the benefit of their children and/or grandchildren. Regardless of your ultimate choice, this is an important decision that should be considered with input from your estate planning professional.  Please contact us today to set up an appointment should you have questions!

Credit: estate planning.com

Existing law allows a judgment creditor to obtain a writ of execution, attachment or garnishment to levy on the property of a judgment debtor or defendant in certain circumstances (NRS 21 and 31). What this means in laymen’s terms is that if you are sued, and the creditor wins, they have the right to collect on that judgment by taking certain property (real property and money held in bank accounts) and even garnishing wages. Nevada provides some protection, however: certain property is exempt from execution and therefore cannot be the subject of such a writ. (NRS 21.

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Establishing a Life Estate is a relatively simple process in which you transfer your property to your children, while retaining your right to use and live in the property. Life Estates are used to avoid probate, maximize tax benefits and protect the real property from potential long-term care expenses you may incur in your later years. Transferring property into a Life Estate avoids some of the disadvantages of making an outright gift of property to your heirs. However, it is not right for everyone and comes with its own set of advantages and disadvantages.

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“I just need a simple will.”  It’s a phrase estate planning attorneys hear practically every other day.   From the client’s perspective, there’s no reason to do anything complicated, especially if it might lead to higher legal fees.  Unfortunately, what may appear to be a “simple” estate is all too often rife with complications that, if not addressed during the planning process, can create a nightmare for you and your heirs at some point in the future.   Such complications may include:

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Many people are confused by advance directives. They are unsure what type of directives are out there, and whether they even need directives at all, especially if they are young. There are several types of advance directives. One is a living will, which communicates what type of life support and medical treatments, such as ventilators or a feeding tube, you wish to receive. Another type is called a health care power of attorney. In a health care power of attorney, you give someone the power to make health care decisions for you in the event are unable to do so for yourself. A third type of advance directive for health care is a do not resuscitate order. A DNR order is a request that you not receive CPR if your heart stops beating or you stop breathing. Depending on the laws in your state, the health care form you execute could include all three types of health care directives, or you may do each individually.

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